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Your 3-minute guide to PCP car finance

It's the most popular type of car finance product in the UK, but many people don't understand how PCP car finance works – so here's a simple guide

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It’s the most popular type of car finance product in the UK, but many people don’t understand how PCP car finance works – so here’s a simple guide. If you’re looking for more information, we have an entire PCP car finance hub that can provide you with plenty of details.

PCP stands for personal contract purchase. It’s used by private customers to purchase a car (either new or used), and usually the car is purchased from a dealership rather than from a private seller.

The PCP is the most comon way to finance a new car. It’s also now the most popular way to finance a used car, especially a relatively new vehicle that’s still quite expensive (say, £10,000 or more). It’s less common for cheaper used cars, where most people will choose a hire purchase (HP) or a personal loan.

How does PCP car finance work?

We cover this in a lot more detail in our dedicated PCP guide, but here’s a quick summary:

  1. The finance company pays the dealership for your new car, minus any up-front payment you’ve made (which can include a part-exchange vehicle)
  2. You pay the finance company back in monthly payments for the next 3-4 years
  3. After you’ve made your last monthly payment, there’s a very large final payment – called a balloon – that needs to be settled. You can either:
    – pay the balloon payment and keep the car
    – give the car back to the finance company and walk away, which cancels the balloon payment (the finance company guarantees that you won’t have to pay any more money as long as you’ve complied with the conditions of the agreement)
    – if the car is worth more than the balloon payment, you can part-exchange it and use the difference as your deposit on your next vehicle

Very few people choose to pay off the balloon and keep the car. It’s usually thousands (if not tens of thousands) of pounds, and most people don’t have that money available to do it. Some people will take the second option to simply give the car back and walk away, but most take the third option and part-exchange the car for another one.

We explore the detail of all three choices in a dedicated article, to help you decide which is the right option for you.

More info here:

  • The monthly payments are cheaper than a hire purchase or personal loan. This is because of how the payments are structured. So instead of paying £500/month for 48 months, you might only spend £299/month for 47 months – but with a massive final balloon payment of £10,000.
  • There are usually good deals on new cars that only apply if you take out a PCP (as opposed to paying cash or using another form of finance).
  • PCPs tend to be great for car dealers and car companies, which is why they promote them so hard.

In practice, customers still tend to spend the same amount of money each month, but they can afford to buy a much more expensive car for their monthly budget than they could afford using an HP. So they’re still spending £400/month, but buying a car that’s maybe 50% dearer.

It’s not a lease

A PCP is often described as a lease, but this is incorrect. It’s a secured loan, like a mortgage on your house. You might be considered the car’s owner, but ultimately it belongs to the bank until the last penny is paid off (just like your house).

A lease is simply a rental, where you pay a monthly fee to drive around in someone else’s car.

However, it’s fair to say that most people do treat a PCP like a lease, because they never have any intention of paying off the final balloon payment. In that case, you should really consider taking out a lease (known as personal contract hire) instead as it may be cheaper.

More info here:

PCP car finance pros and cons

Pros:

  • Your monthly payments are lower than on a personal loan or hire purchase. This is because you’re not paying off the full amount that you borrowed (there’s that big balloon payment at the end).
  • There are also usually plenty of deals available on PCP car finance from most car brands, compared to paying cash or using another type of finance.
  • If you intend to change your car every 3-4 years, a PCP keeps your overall spend down compared to a loan where you repay the full amount. If you never intend to keep the car, you’re not paying for the balloon.
  • The end value is guaranteed, so you can give the car back and walk away at the end of your agreement without paying off the balloon (very important terms and conditions apply, however)

Cons

  • Customers tend to get trapped in an endless PCP cycle, where they have to either pay off a huge balloon payment or give the car back. So they give the car back and start another PCP with another car.
  • If your financial circumstances change and you can no longer afford your monthly payments, you could be stuck with a very large debt. You’ll still owe your remaining monthly payments plus the balloon payment that will be thousands of pounds.

Summary

Although it remains the most popular way to finance a new or used car, and is the one pushed hardest by dealers (because it suits their needs, rather than yours), there are many other alternatives to PCP car finance that you should consider when choosing your next new or used car.

However, PCPs tend to have the best deals available from car dealers and manufacturers – especially on new cars – so it does often work out to be the cheapest way to finance a car.

If you do want to take a PCP, make sure you understand your financial commitments, both up-front and throughout the course of the agreement.

More PCP advice and information here:

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Stuart Masson
Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.